Gail Stanwood v. Minister of National Revenue, [1991] 1 CTC 2624, 91 DTC 636

Kempo, T.C.j.:—The applicant, Ms. Gail Stanwood, has launched this application for an extension of time within which she may be allowed to file an objection to an assessment of tax for her 1988 taxation year. The assessment sought to be objected to was founded on the applicant's filing of her return of income for that year pursuant to which the Minister assessed following her own calculations of her liability for tax therein.

During 1988 the applicant was then a student in a certified general accounting program with a still very limited knowledge of income tax matters. She was approached by her friend, Mr. Anthony Bullock, who convinced her to acquire some stock options which were to be ostensibly on her own behalf but in actuality 90 per cent of them was to be for his own company and 10 per cent was to be for herself. The reason for the matter being handled that way was because those stock options were available only to individuals and not to a corporation. Mr. Bullock’s company, Harrington Capital Corporation ('Harrington"), paid for its part and the applicant paid for her ten per cent portion. The stock options were exercised at $0.90 per share at a time when their trading price on the Vancouver Stock Exchange was $2.60 per share. The applicant agreed to bear the tax liability with respect to the whole matter. She was provided with a written indemnification for reimbursement from Harrington.

Apparently Harrington received its shares, sold them, and ostensibly had reported same on its own return of income. The applicant, following her agreement, reported the acquisition and disposition of all of the subject shares on her own account in her 1988 return. Mr. Bullock said he had had conversations with the applicant's accountant and tax advisor, Mr. Gee, about the whole matter between the spring of 1988 and the fall of 1989 concerning the applicant's liability for tax.

The applicant testified that she participated in the scheme for the opportunity to make money, which approached $10,000. She received no professional advice for purposes of entering into the arrangement but had received advice from Mr. Gee for reporting purposes. She said Mr. Gee was fully knowledgeable that in substance she was acting as Harrington's nominee with respect to 90 per cent of the shares. Mr. Gee was not called to testify. Tax liability for the whole amount was reported as aforesaid, with the applicant looking to Harrington for indemnification as to 90 per cent.

A notice of assessment dated September 7, 1989 was sent indicating that the T1 return was assessed as filed. The applicant had looked to Harrington for quarterly payments of $11,414.64 during 1989 to satisfy their portion of their tax liability. Only one payment of $11,414.64 was paid. She said on receipt of the assessment she was shocked at the $61,000 owing and that she did not have the funds to pay it. On September 15, 1989, she consulted an experienced tax lawyer, Steven Cook, who had advised her to either pay it or make full disclosure to Revenue Canada. She could not recall whether the assessment notice was in the file materials she gave to Mr. Cook or whether she had even told him about it or had provided it to him. She said her reason for seeing him was "to see if there was any recourse, if there was any way to deal with this”. She said she had made him fully apprised of the whole stock matter and thatshe was a mere nominee. She was adamant that she had not received any suggestion or advice from Mr. Cook with respect to any opportunity or possibility of the filing a notice of objection to the assessment. Through Mr. Cook's efforts and his contact with Harrington, the appellant received several post-dated cheques, but only for small amounts.

The applicant was fully aware that only an individual could pick up the stock options. She also fully conceded that if Harrington had made the promised indemnification payments she would never have thought of objecting and that "everything would have been fine”.

Mr. Steven Cook testified at the behest of the Minister. He confirmed being apprised by the applicant of the agreement with respect to the shares but that he was unaware of the assessment, that he was not made aware of the assessment, and that the applicant did not ask him how she could contest any such assessment. He said there was no discussion at all about this matter, and that he had not specifically asked her if there had been one notwithstanding his knowledge that spring filings usually produced assessments by the following fall.

Mr. Cook's analysis during this time was that the applicant had either contravened securities legislation or that she had improperly reported her stock option benefit in her return. He said that he had recommended that she make a voluntary disclosure after a legal opinion had been obtained that any potential securities consequences were less significant than having to be burdened with an improper tax liability. He conceded on cross-examination that valid arguments could have been advanced against the assessment, that no time limits had been discussed, and that essentially his sole recommendation had been that of voluntary disclosure.

On October 31, 1989, Mr. Cook sent the applicant an account for his legal services since he felt he had done what he could by October 3 without having heard anything further. He then received a letter from the applicant dated November 14, 1989 advising that she had received four post-dated cheques from Harrington in the amounts of $2,500 and three for $1,500 dated December 1, 1989 forward. In this letter she expressed her own discomfort as to how things were developing, and she asked Mr. Cook not to close his file as yet. Nothing further was heard by him on the matter thereafter.

The 90th day for filing an objection expired on December 7, 1989.

Following discussions with the principals of Harrington, the applicant consulted another tax lawyer on January 12, 1990. He said she was then advised, for the first time, that a notice of objection could and should be filed with respect to the calculations of the stock option benefit on taxable income. The within application was brought on February 28, 1990.

Counsel for the Minister advised the Court that the Minister was not contesting that reasonable grounds for objection existed or that the application had Been brought other than as soon as circumstances permitted. With respect to the latter it was felt that, having regard to all the circumstances, the period of January 12 to February 28 was not an unreasonable time delay.

Counsel's submissions in support of the Minister's opposition were twofold. Firstly, there was no thought by the applicant, within the 90-day period, to contest the assessment itself. Rather, all of her efforts were directed to finding ways to make Harrington honour their indemnity. Secondly, the Court should decline to use its equitable jurisdiction to assist the applicant because her conduct amounted to"an end-run around securities statutes” and that she was now seeking equity with ” unclean hands”.

As to the first position, I am satisfied that all of the discussions between the applicant and Mr. Cook had touched upon the securities and indemnity aspects of the matter and that there was no thought or communication respecting an actual assessment having been issued. Taking the whole matter into consideration, and accepting both Mr. Cook's and the applicant's evidence as being plausible and credible, I am of the opinion that had such communication arisen between them the advice of time limits would have been given by Mr. Cook and that such advice would have been acted upon by the applicant within the prescribed time. Mr. Cook was an experienced tax counsel and the applicant was an intelligent, educated businesswoman. As I analyze it, the specific subject of an assessment and an objection simply fell through the cracks and that, but for this omission, the applicant would have filed a timely objection. Given all of the above, it can hardly be said that the applicant exhibited neglect or indifference with respect to her legal remedies during the 90-day time period.

As to the equitable concerns expressed by the Minister's counsel, and because it may not impact in any event on the applicant's fiscal liability per se, it remains dubious as to how, or why, it should operate as a complete bar to her on a matter such as this. Her "impugned" conduct arose solely out of the matters and conduct with respect to her ultimate liability for tax; it is not connected to any improprieties on her part surrounding the application itself.

Counsel's submission, that a person seeking equity should show that he or she has done equity, is correct. In this respect the applicant must show good faith, and freedom from having committed or participated in intentional deceit, malice or other such culpable conduct as to all relevant matters surrounding the making and prosecution of the application. Nothing in the applicant's conduct respecting this application falls within these parameters, and therefore she has "come with clean hands” as that expression is understood in equity.

Further, to accede to counsel's submission would in my view amount to adding another condition to those specified in section 167 which has been authoritatively held to be exhaustive: McGill v. M.N.R., [1985] 2 C.T.C. 209; 85 D.T.C. 5439 at 210 (D.T.C. 5440). This may be exemplified in a situation under which an extension of time is opposed for a taxpayer who is alleged to have knowingly and deliberately failed to disclose income, such “unclean hands" being attributable to this kind of conduct. As these matters are really yet to be reviewed, litigated and judicially determined, they should have no real place in time extension applications. In the same vein, the applicant's purported infringement of securities legislation may, after review in the cause, have no ultimate relevance with respect to the fixation of her liability for tax.

Returning to the evidence, the applicant has shown she had promptly attended to exercising her legal fiscal rights upon being apprised of them, and that during the 90-day period she had not been reckless or indifferent to the proper manner of exercising those rights; see McGill, supra, at 210 (D.T.C. 5440).

My conclusion, for the reasons stated herein, is that it is just and equitable to allow the remedy being sought and accordingly the application is granted.

Application granted.